The housing market felt much better and while the

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yet another increase in the “dose”. The housing market felt much better. And while the government was patting itself on the back for easing the housing pain and stabilizing markets, the tax credits expired and, in July 2010, sales of new homes sank to the lowest point since the 1960s when the government started keeping records. Now again, there is discussion of what to do next. Like addiction to painkillers, these remedies provide short-term “benefits” against increasing costs in the long-term. Which solution lawmakers ultimately choose for the future of the GSEs depends intimately on how they answer the much deeper question of how much society should promote and subsidize homeownership. 9.1 The Economics of Subsidizing Homeownership In a November 3, 2009, report “An Overview of Federal Support for Housing”, the Congressional Budget Office (CBO) estimated that the federal government provided approximately $300 billion in subsidies to housing and mortgage markets in 2009. As a comparison, the much maligned farm subsidies and support for energy initiatives each receive approximately $20 billion per year. The degree of support for home ownership is staggering.
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127 In the U.S., home ownership in particular is stimulated by four main government policies: the home-mortgage interest rate and property tax deductibility, the tax exemption of rental income enjoyed implicitly from homeownership, the exemption from income tax of capital gains on the sale of owner-occupied houses, and the lower interest rates that are enjoyed thanks to government support of the GSEs. In addition, there is a myriad of other programs, such as the reduced interest cost on mortgages insured by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (the former Veterans Administration, or VA), tax credits for home purchases, favorable funding from the Federal Home Loan Bank System (as well as FDIC deposit insurance) for thrifts and other depository institutions that invest in real estate, and mandates for thrifts to invest in residential mortgages. Finally, there are programs that stimulate housing more broadly, such as rent subsidy programs, subsidies for the construction of rental housing (e.g., low income housing tax credit), and direct provision of public housing by the government. “Too much is never enough” is a reasonable summary of this array of housing policies. As the CBO report outlined, these programs are expensive: The current home mortgage interest rate deductibility, for example, will cost $105 billion in lost federal tax revenue in fiscal year 2011. Property tax exemption, exclusion of rental income, and exclusion of capital gains taxes upon sale of the house will cost an additional $92 billion in 2011. These programs come at a cost that is overlooked in the public debate: They make housing relatively cheaper and other goods relatively more expensive. This, in turn, leads to more consumption of housing, more investment in housing and construction, but less business investment and less consumption of non-housing goods and services. The consensus among
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